NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
References in the Notes to "Lumen Technologies" or "Lumen," "we," "us" and "our" refer to CenturyLink, Inc. (doing business as Lumen Technologies) and its consolidated subsidiaries, unless the context otherwise requires and except in Note 5—Long-Term Debt and Credit Facilities, where such references refer solely to CenturyLink, Inc. References in the Notes to "Level 3" refer Level 3 Parent, LLC and its predecessor Level 3 Communications, Inc., which we acquired on November 1, 2017.
(1) Background
General
We are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our business and residential customers. Our specific products and services are detailed in Note 11—Segment Information
Basis of Presentation
Our consolidated balance sheet as of December 31, 2019, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the SEC. However, in our opinion, the disclosures made therein are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations and cash flows for the first nine months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.
To simplify the overall presentation of our consolidated financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other loss, net, (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net, financing activities.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue and expenses in our segment reporting. See Note 11—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net income (loss) for any period.
Operating lease assets are included in Other, net under goodwill and other assets on our consolidated balance sheets. Noncurrent operating lease liabilities are included in Other under deferred credits and other liabilities on our consolidated balance sheets.
There were no book overdrafts included in accounts payable at September 30, 2020. Included in accounts payable at December 31, 2019 was $106 million representing book overdrafts.
Summary of Significant Accounting Policies
The significant accounting policy below is in addition to the significant accounting policies described in Note 1 — Background and Summary of Significant Accounting Policies to the consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.
Change in Accounting Policy
During the first quarter of 2020, we elected to change the presentation for taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, including federal and certain state Universal Service Fund (USF) regulatory fees, to present all such taxes on a net basis in our consolidated statements of operations. Prior to the first quarter of 2020, we assessed whether we were the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. The previous policy resulted in presenting such USF fees on a gross basis within operating revenue and cost of services and products, and all other significant taxes on a net basis. We applied this change in accounting policy retrospectively during the first quarter of 2020. As a result, we have decreased both operating revenue and cost of services and products by $253 million and $256 million for the three months ended September 30, 2020 and 2019, respectively, and $672 million and $679 million for the nine months ended September 30, 2020 and 2019, respectively. The change has no impact on operating income (loss), net income (loss), or earnings (loss) per share in our consolidated statements of operations. Refer to our Form 8-K filing dated April 30, 2020 for further information.
We changed our policy to present such taxes on the net basis and believe the new policy is preferable because of the historical and potential future regulatory rate changes outside of our control resulting in significant variability in tax and fee revenue that are not indicative of our operating performance. We believe the net presentation provides the most useful and transparent financial information and improves comparability and consistency of financial results.
Operating Lease Income
Lumen Technologies leases various dark fiber, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in our consolidated statements of operations.
For the three months ended September 30, 2020 and 2019, our gross rental income was $332 million and $202 million, respectively, which represents approximately 6% and 4%, respectively, of our operating revenue for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019, our gross rental income was $998 million and $606 million, respectively, which represents 6% and 4%, respectively, of our operating revenue for the nine months ended September 30, 2020 and 2019.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires us to estimate the total credit losses expected on the portfolio of financial instruments.
We adopted ASU 2016-13 on January 1, 2020, and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $9 million, net of tax effect. Please refer to Note 4—Credit Losses on Financial Instruments for more information.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)" ("ASU 2019-12"). ASU 2019-12 removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted. We do not believe the adoption will have a significant impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"), designed to ease the burden of accounting for contract modifications related to the global market-wide reference rate transition period. Subject to certain criteria, ASU 2020-04 provides qualifying entities the option to apply expedients and exceptions to contract modifications and hedging accounting relationships made until December 31, 2022. We are evaluating ASU 2020-04's applicability to relevant transactions referencing the London Inter-bank Offering Rate ("LIBOR") or another reference rate expected to be discontinued and the resulting impact on our consolidated financial statements.
(2) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(Dollars in millions)
|
|
Goodwill
|
$
|
21,476
|
|
|
21,534
|
|
|
Indefinite-life intangible assets
|
$
|
278
|
|
|
269
|
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
Customer relationships, less accumulated amortization of $10,742 and $9,809
|
6,633
|
|
|
7,596
|
|
|
Capitalized software, less accumulated amortization of $3,232 and $2,957
|
1,567
|
|
|
1,599
|
|
|
Trade names and patents, less accumulated amortization of $113 and $91
|
85
|
|
|
103
|
|
|
Total other intangible assets, net
|
$
|
8,563
|
|
|
9,567
|
|
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
We assess our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of any of our reporting units exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess our reporting units. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31.
Our reporting units are not discrete legal entities with discrete full financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units. For each reporting unit, we compare its estimated fair value of equity to its carrying value of equity that we assign to the reporting unit. If the estimated fair value of the reporting unit is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, we record an impairment equal to the excess amount. Depending on the facts and circumstances, we typically estimate the fair value of our reporting units by considering either or both of (i) a market approach, which includes the use of multiples of publicly-traded companies whose services are comparable to ours, and (ii) a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period.
Both our January 2019 internal reorganization and the decline in our stock price triggered impairment testing in the first quarter of 2019. Because our low stock price was a key trigger for impairment testing during the first quarter of 2019, we estimated the fair value of our operations in such quarter using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which have historically supported a range of fair values derived from annualized revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units within this range. We reconciled the estimated fair values of the reporting units to our market capitalization as of the date of each of our triggering events during the first quarter of 2019 and concluded that the indicated control premium of approximately
4.5% and 4.1% was reasonable based on recent market transactions. In the quarter ended March 31, 2019, based on our assessments performed with respect to the reporting units as described above, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our triggering events during the first quarter. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to $6.5 billion in the quarter ended March 31, 2019.
The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. Our assessment included many qualitative factors that required significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the size of our impairments.
During 2020, we observed a decline in our stock price as a result of events occurring after the end of 2019, including the COVID-19 pandemic. We evaluated whether such events would indicate the fair value of our reporting units were below their carrying values. We believe these events have impacted the global economy more directly than us and, when considered with other factors, we have concluded it is not more likely than not that the fair values of our reporting units were less than their carrying values as of the period ended September 30, 2020. In light of the negative impacts of COVID-19 on the global economy, we will continue to evaluate the general economic trends which could have an impact on our assessment of whether it is more likely than not that the fair value of one or more reporting units is less than its carrying amount. Future changes could cause one or more of our reporting unit fair values to be less than its carrying value, resulting in potential impairments of our goodwill, which could have a material effect on our results of operations and financial condition. The extent of the impact, if any, will depend on future developments, including the length and severity of the pandemic and its long-term impacts on the overall economy.
The following table shows the rollforward of goodwill assigned to our reportable segments from December 31, 2019 through September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total
|
|
|
(Dollars in millions)
|
|
As of December 31, 2019
|
$
|
2,670
|
|
4,738
|
|
3,259
|
|
3,813
|
|
7,054
|
|
21,534
|
|
|
Effect of foreign currency exchange rate change and other
|
(51)
|
|
—
|
|
(7)
|
|
—
|
|
—
|
|
(58)
|
|
|
As of September 30, 2020
|
$
|
2,619
|
|
4,738
|
|
3,252
|
|
3,813
|
|
7,054
|
|
21,476
|
|
Total amortization expense for intangible assets for the three months ended September 30, 2020 and 2019 totaled $443 million and $438 million, respectively, and for both the nine months ended September 30, 2020 and 2019 totaled $1.3 billion. As of September 30, 2020, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $44.1 billion.
We estimate that total amortization expense for intangible assets for the years ending December 31, 2020 through 2024 will be as follows:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2020 (remaining three months)
|
$
|
418
|
|
|
2021
|
1,252
|
|
|
2022
|
1,019
|
|
|
2023
|
934
|
|
|
2024
|
867
|
|
(3) Revenue Recognition
Reconciliation of Total Revenue to Revenue from Contracts with Customers
The following table provides the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Total revenue
|
$
|
5,167
|
|
|
5,350
|
|
|
15,587
|
|
|
16,152
|
|
|
Adjustments for non-ASC 606 revenue (1)
|
(481)
|
|
|
(355)
|
|
|
(1,443)
|
|
|
(1,069)
|
|
|
Total revenue from contracts with customers
|
$
|
4,686
|
|
|
4,995
|
|
|
14,144
|
|
|
15,083
|
|
______________________________________________________________________
(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(Dollars in millions)
|
|
Customer receivables(1)
|
$
|
2,070
|
|
|
2,194
|
|
|
Contract assets
|
104
|
|
|
130
|
|
|
Contract liabilities
|
918
|
|
|
1,028
|
|
______________________________________________________________________
(1)Reflects gross customer receivables of $2.2 billion and $2.3 billion, net of allowance for doubtful accounts of $140 million and $94 million, at September 30, 2020 and December 31, 2019, respectively.
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2020, we recognized $58 million and $612 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020. During the three and nine months ended September 30, 2019, we recognized $47 million and $581 million, respectively, of revenue that was included in contract liabilities as of January 1, 2019.
Performance Obligations
As of September 30, 2020, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $5.4 billion. We expect to recognize approximately 85% of this revenue through 2022, with the balance recognized thereafter.
These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Three Months Ended September 30, 2019
|
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
|
(Dollars in millions)
|
|
Beginning of period balance
|
$
|
300
|
|
|
219
|
|
|
321
|
|
|
207
|
|
|
Costs incurred
|
45
|
|
|
35
|
|
|
48
|
|
|
41
|
|
|
Amortization
|
(53)
|
|
|
(37)
|
|
|
(50)
|
|
|
(32)
|
|
|
End of period balance
|
$
|
292
|
|
|
217
|
|
|
319
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
|
(Dollars in millions)
|
|
Beginning of period balance
|
$
|
326
|
|
|
221
|
|
|
322
|
|
|
187
|
|
|
Costs incurred
|
130
|
|
|
105
|
|
|
148
|
|
|
119
|
|
|
Amortization
|
(164)
|
|
|
(109)
|
|
|
(151)
|
|
|
(90)
|
|
|
End of period balance
|
$
|
292
|
|
|
217
|
|
|
319
|
|
|
216
|
|
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities.
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months for consumer customers and 12 to 60 months for business customers. Amortized fulfillment costs are included in cost of services and products, and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next 12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.
(4) Credit Losses on Financial Instruments
In accordance with ASC 326, "Financial Instruments - Credit Losses" we aggregate financial assets with similar risk characteristics to align our expected credit losses with the credit quality or deterioration over the life of such assets. We monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change each reporting period. Financial assets that do not share risk characteristics with other financial assets are evaluated separately. Our financial assets measured at amortized cost primarily consist of accounts receivable.
In developing our accounts receivable portfolio, we pooled certain assets with similar credit risk characteristics based on the nature of our customers, their industry, policies used to grant credit terms and their historical and expected credit loss patterns. We grouped assets from our International and Global Accounts, Enterprise, Small and Medium Business and Wholesale segments into the Business portfolio in the below table.
Prior to the adoption of the new credit loss standard, the allowance for doubtful accounts receivable reflected our best estimate of probable losses inherent in our receivable portfolio determined based on historical experience, specific allowances for known troubled accounts, and other currently available evidence.
We implemented the new standard effective January 1, 2020, using a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our use of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to update our current loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. The historical, current, and expected credit loss rates are combined and applied to period end accounts receivable, which results in our allowance for credit losses.
If there is a deterioration of a customer's financial condition or if future default rates in general differ from currently anticipated default rates (including changes caused by COVID-19), we may need to adjust the allowance for credit losses, which would affect earnings in the period that adjustments are made.
The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future.
The following table presents the activity of our allowance for credit losses by accounts receivable portfolio:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Business
|
|
Consumer
|
|
Total
|
|
|
|
|
|
Beginning balance at January 1, 2020 (1)
|
$
|
58
|
|
|
37
|
|
|
95
|
|
|
|
|
|
|
Provision for expected losses
|
82
|
|
|
55
|
|
|
137
|
|
|
|
|
|
|
Write-offs charged against the allowance
|
(53)
|
|
|
(52)
|
|
|
(105)
|
|
|
|
|
|
|
Recoveries collected
|
18
|
|
|
13
|
|
|
31
|
|
|
|
|
|
|
Foreign currency exchange rate changes adjustment
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
Ending balance at September 30, 2020
|
$
|
103
|
|
|
53
|
|
|
156
|
|
|
|
|
|
______________________________________________________________________
(1)The beginning balance includes the cumulative effect of the adoption of new credit loss standard.
For the nine months ended September 30, 2020, we increased our allowance for credit losses for our business and consumer accounts receivable portfolios due to an increase in historical and expected loss experience in certain classes of aged balances, which we believe were predominantly attributable to the COVID-19 induced economic slowdown. We believe that decreased write-offs (net of recoveries) driven by COVID-19 regulations and programs have further contributed to an increase in our allowance for credit losses.
(5) Long-Term Debt and Credit Facilities
The following chart reflects the consolidated long-term debt of Lumen Technologies and its subsidiaries, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany debt:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates(1)
|
|
Maturities(1)
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Senior Secured Debt: (2)
|
|
|
|
|
|
|
|
|
CenturyLink, Inc.
|
|
|
|
|
|
|
|
|
Revolving Credit Facility (3)
|
LIBOR + 2.00%
|
|
2025
|
|
$
|
1,075
|
|
|
250
|
|
|
Term Loan A (3)(4)
|
LIBOR + 2.00%
|
|
2025
|
|
1,123
|
|
|
1,536
|
|
|
Term Loan A-1 (3)(4)
|
LIBOR + 2.00%
|
|
2025
|
|
321
|
|
|
333
|
|
|
Term Loan B (3)(5)
|
LIBOR + 2.25%
|
|
2027
|
|
4,963
|
|
|
5,880
|
|
|
Senior notes
|
4.000%
|
|
2027
|
|
1,250
|
|
|
—
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
Level 3 Financing, Inc.
|
|
|
|
|
|
|
|
|
Tranche B 2027 Term Loan (6)
|
LIBOR + 1.75%
|
|
2027
|
|
3,111
|
|
|
3,111
|
|
|
Senior notes
|
3.400% - 3.875%
|
|
2027 - 2029
|
|
1,500
|
|
|
1,500
|
|
|
Embarq Corporation subsidiaries
|
|
|
|
|
|
|
|
|
First mortgage bonds
|
7.125% - 8.375%
|
|
2023 - 2025
|
|
138
|
|
|
138
|
|
|
Senior Notes and Other Debt:
|
|
|
|
|
|
|
|
|
CenturyLink, Inc.
|
|
|
|
|
|
|
|
|
Senior notes
|
5.125% - 7.650%
|
|
2021 - 2042
|
|
7,645
|
|
|
8,696
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
Level 3 Financing, Inc.
|
|
|
|
|
|
|
|
|
Senior notes
|
3.625% - 5.375%
|
|
2024 - 2029
|
|
5,515
|
|
|
5,515
|
|
|
Qwest Corporation
|
|
|
|
|
|
|
|
|
Senior notes
|
6.125% - 7.750%
|
|
2021 - 2057
|
|
4,105
|
|
|
5,956
|
|
|
Term Loan (7)
|
LIBOR + 2.00%
|
|
2025
|
|
100
|
|
|
100
|
|
|
Qwest Capital Funding, Inc.
|
|
|
|
|
|
|
|
|
Senior notes
|
6.875% - 7.750%
|
|
2021 - 2031
|
|
352
|
|
|
352
|
|
|
Embarq Corporation and subsidiary
|
|
|
|
|
|
|
|
|
Senior note
|
7.995%
|
|
2036
|
|
1,437
|
|
|
1,450
|
|
|
Finance lease and other obligations
|
Various
|
|
Various
|
|
292
|
|
|
222
|
|
|
Unamortized discounts, net
|
|
|
|
|
(77)
|
|
|
(52)
|
|
|
Unamortized debt issuance costs
|
|
|
|
|
(258)
|
|
|
(293)
|
|
|
Total long-term debt
|
|
|
|
|
32,592
|
|
|
34,694
|
|
|
Less current maturities
|
|
|
|
|
(1,487)
|
|
|
(2,300)
|
|
|
Long-term debt, excluding current maturities
|
|
|
|
|
$
|
31,105
|
|
|
32,394
|
|
______________________________________________________________________
(1)As of September 30, 2020.
(2)See Note 7—Long-Term Debt and Credit Facilities in our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of certain parent or subsidiary guarantees and liens securing this debt.
(3)CenturyLink, Inc.'s credit agreement was amended as noted below, extending the maturity date of its (a) Term Loan A, Term Loan A-1 and Revolving Credit Facilities from 2022 to 2025 and (b) Term Loan B from 2025 to 2027.
(4)Term Loans A and A-1 had interest rates of 2.147% and 4.549% as of September 30, 2020 and December 31, 2019, respectively.
(5)Term Loan B had interest rates of 2.397% and 4.549% as of September 30, 2020 and December 31, 2019, respectively.
(6)The Tranche B 2027 Term Loan had an interest rate of 1.897% as of September 30, 2020 and 3.549% as of December 31, 2019, respectively.
(7)Qwest Corporation Term Loan had an interest rate of 2.150% as of September 30, 2020 and 3.800% as of December 31, 2019, respectively.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of September 30, 2020 (excluding unamortized discounts, net, and unamortized debt issuance costs), maturing during the following years:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2020 (remaining three months)
|
$
|
54
|
|
|
2021
|
2,423
|
|
|
2022
|
1,541
|
|
|
2023
|
965
|
|
|
2024
|
2,041
|
|
|
2025 and thereafter
|
25,903
|
|
|
Total long-term debt
|
$
|
32,927
|
|
Amended and Restated Credit Agreement
On January 31, 2020, we amended and restated our credit agreement dated June 19, 2017 (as so amended and restated, the “Amended Credit Agreement”). Coupled with CenturyLink, Inc.’s prepayment on January 24, 2020 of $1.25 billion of indebtedness outstanding under its Term Loan B facility (using principally the net proceeds from its below-described sale of $1.25 billion of its 4.000% Senior Secured Notes due 2027), the Amended Credit Agreement then provided for approximately $8.699 billion in senior secured credit facilities, consisting of; (i) an approximately $1.166 billion Term Loan A credit facility, (ii) a $333 million Term Loan A-1 credit facility, (iii) a $5.0 billion Term Loan B credit facility and (iv) a $2.2 billion revolving credit facility (collectively, the “Amended Senior Secured Credit Facilities”).
The Amended Credit Agreement, among other things, (i) extended the maturity date of (a) the Term Loan A, Term Loan A-1 and revolving credit facilities from November 1, 2022 to January 31, 2025 and (b) the Term Loan B facility from January 31, 2025 to March 15, 2027, and (ii) lowered the interest rate applicable to loans made under each of the Amended Senior Secured Credit Facilities. As so amended, (i) loans under the Term Loan A, Term Loan A-1 and revolving credit facilities will bear interest at a rate equal to, at CenturyLink, Inc.’s option, the Eurodollar rate or the alternative base rate (each as defined in the Amended Credit Agreement) plus an applicable margin between 1.50% to 2.25% per annum for Eurodollar loans and 0.50% to 1.25% per annum for alternative base rate loans, depending on CenturyLink, Inc.’s then current total leverage ratio, and (ii) loans under the Term Loan B facility will bear interest at the rate equal to, at CenturyLink, Inc.’s option, the Eurodollar rate plus 2.25% per annum or the alternative base rate plus 1.25% per annum. The subsidiary guarantor and collateral provisions and the financial covenants contained in the Amended Credit Agreement are unchanged from the credit agreement dated June 19, 2017.
These January 2020 transactions resulted in an aggregate net loss of $67 million from modification and extinguishment of the debt.
Repayments
During the nine months ended September 30, 2020, CenturyLink, Inc. and its affiliates repurchased approximately $5.2 billion of their respective debt securities, which primarily included $1.25 billion of CenturyLink, Inc. credit agreement debt, $1.9 billion of Qwest Corporation senior notes, $78 million of CenturyLink, Inc. senior notes and $2.0 billion of Level 3 Financing, Inc. senior notes, which resulted in a loss of $82 million, including the $67 million loss resulting from the modification of the Amended Credit Agreement discussed above.
In addition, during the nine months ended September 30, 2020, CenturyLink, Inc. (i) paid at maturity $973 million aggregate principal amount of its outstanding senior notes and (ii) made $94 million of scheduled amortization payments under its term loans.
New Issuances
On August 12, 2020, Level 3 Financing, Inc., issued $840 million aggregate principal amount of its 3.625% Senior Notes due 2029 (the "2029 Notes"). Level 3 Financing, Inc. used the net proceeds from this offering to redeem certain of its outstanding senior note indebtedness. See "—Repayments" above. The 2029 Notes are (i) unconditionally guaranteed by Level 3 Parent, LLC, and (ii) expected to be unconditionally guaranteed by Level 3 Communications, LLC upon receipt of all requisite material governmental authorizations.
On June 15, 2020, Level 3 Financing, Inc., issued $1.2 billion aggregate principal amount of its 4.250% Senior Notes due 2028 (the "2028 Notes"). Level 3 Financing, Inc. used the net proceeds from this offering to redeem certain of its outstanding senior note indebtedness. See "—Repayments" above. The 2028 Notes are (i) unconditionally guaranteed by Level 3 Parent, LLC and (ii) expected to be unconditionally guaranteed by Level 3 Communications, LLC, upon receipt of all requisite material governmental authorizations.
On January 24, 2020, CenturyLink, Inc. issued $1.25 billion aggregate principal amount of its 4.000% Senior Secured Notes due 2027 (the “2027 Notes”). As noted above, CenturyLink, Inc. used the net proceeds from this offering to repay a portion of the outstanding indebtedness under its Term Loan B facility. The 2027 Notes are unconditionally guaranteed by each of CenturyLink, Inc.'s domestic subsidiaries that guarantee CenturyLink, Inc.'s Amended Credit Agreement. While the 2027 Notes are not secured by any of the assets of CenturyLink, Inc., certain of the note guarantees are secured by a first priority security interest in substantially all of the assets of such guarantors (including the stock of certain of their respective subsidiaries), which assets also secure obligations under the Amended Credit Agreement on a pari passu basis.
Covenants
Certain of our debt instruments contain affirmative and negative covenants. Debt at CenturyLink, Inc. and Level 3 Financing, Inc. contain more extensive covenants including, among other things and subject to certain exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates, dispose of assets and merge or consolidate with any other person. Also, CenturyLink, Inc. and certain of its affiliates will be required to offer to purchase certain of their respective outstanding debt under certain circumstances in connection with certain specified "change of control" transactions.
Certain of our debt instruments contain cross-acceleration provisions.
Compliance
As of September 30, 2020, CenturyLink, Inc., believes it and its subsidiaries were in compliance with the provisions and financial covenants in their respective material debt agreements in all material respects.
Subsequent Events
On October 23, 2020, Qwest Corporation borrowed $215 million under a variable-rate term loan with CoBank ACB and used the resulting net proceeds to pay off its previous $100 million term loan with CoBank ACB. Additionally, on October 26, 2020, Qwest Corporation used the remaining net proceeds to partially facilitate the redemption of the remaining $160 million aggregate principal amount of its outstanding 6.625% Notes due 2055 (the "6.625% Notes"), as described below. The new term loan will mature on October 23, 2027, and has terms substantially similar to those contained in the prior term loan with CoBank ACB.
On October 26, 2020, Qwest Corporation redeemed the remaining $160 million aggregate principal amount of its outstanding 6.625% Notes. Following this redemption there were no bonds outstanding for the 6.625% Notes.
(6) Severance
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.
Changes in our accrued liabilities for severance expenses were as follows:
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(Dollars in millions)
|
|
Balance at December 31, 2019
|
$
|
89
|
|
|
Accrued to expense
|
62
|
|
|
Payments, net
|
(121)
|
|
|
Balance at September 30, 2020
|
$
|
30
|
|
(7) Employee Benefits
Net periodic benefit (income) expense for our combined pension plan includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Service cost
|
$
|
15
|
|
|
14
|
|
|
44
|
|
|
42
|
|
|
Interest cost
|
81
|
|
|
109
|
|
|
243
|
|
|
326
|
|
|
Expected return on plan assets
|
(147)
|
|
|
(155)
|
|
|
(445)
|
|
|
(464)
|
|
|
Recognition of prior service credit
|
(3)
|
|
|
(2)
|
|
|
(7)
|
|
|
(6)
|
|
|
Recognition of actuarial loss
|
50
|
|
|
54
|
|
|
152
|
|
|
167
|
|
|
Net periodic pension benefit (income) expense
|
$
|
(4)
|
|
|
20
|
|
|
(13)
|
|
|
65
|
|
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Benefit Plans
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Service cost
|
$
|
4
|
|
|
3
|
|
|
11
|
|
|
11
|
|
|
Interest cost
|
17
|
|
|
27
|
|
|
57
|
|
|
82
|
|
|
Recognition of prior service cost
|
4
|
|
|
5
|
|
|
12
|
|
|
13
|
|
|
Curtailment loss
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
Net periodic post-retirement benefit expense
|
$
|
32
|
|
|
35
|
|
|
87
|
|
|
106
|
|
Service costs are included in the cost of services and products and selling, general and administrative line items on the consolidated statements of operations and all other costs listed above are included in the other income (loss), net line item on the consolidated statements of operations. Benefits paid by our qualified pension plan are paid through a trust that holds all of the plan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension plan during 2020. The amount of required contributions to our qualified pension plan in 2021 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. We occasionally make voluntary contributions in addition to required contributions. Based on current circumstances, we do not anticipate making a voluntary contribution to the trust for our qualified pension plan in 2020. As a result of ongoing efforts to reduce our workforce in 2020, we recognized a one-time curtailment accounting charge of $7 million upon remeasurement of our medical obligations under our post-retirement benefit plans for the three and nine months ended September 30, 2020.
(8) Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per common share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(Dollars in millions, except per share amounts, shares in thousands)
|
|
Income (Loss) (Numerator):
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
366
|
|
|
302
|
|
|
1,057
|
|
|
(5,492)
|
|
|
Net income (loss) applicable to common stock for computing basic earnings per common share
|
366
|
|
|
302
|
|
|
1,057
|
|
|
(5,492)
|
|
|
Net income (loss) as adjusted for purposes of computing diluted earnings per common share
|
$
|
366
|
|
|
302
|
|
|
1,057
|
|
|
(5,492)
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
|
Weighted-average number of shares:
|
|
|
|
|
|
|
|
|
Outstanding during period
|
1,097,496
|
|
|
1,090,755
|
|
|
1,096,017
|
|
|
1,088,229
|
|
|
Non-vested restricted stock
|
(16,991)
|
|
|
(18,212)
|
|
|
(17,345)
|
|
|
(17,308)
|
|
|
Weighted-average shares outstanding for computing basic earnings per common share
|
1,080,505
|
|
|
1,072,543
|
|
|
1,078,672
|
|
|
1,070,921
|
|
|
Incremental common shares attributable to dilutive securities:
|
|
|
|
|
|
|
|
|
Shares issuable under convertible securities
|
10
|
|
|
10
|
|
|
10
|
|
|
—
|
|
|
Shares issuable under incentive compensation plans
|
5,151
|
|
|
2,237
|
|
|
4,686
|
|
|
—
|
|
|
Number of shares as adjusted for purposes of computing diluted earnings (loss) per common share
|
1,085,666
|
|
|
1,074,790
|
|
|
1,083,368
|
|
|
1,070,921
|
|
|
Basic earnings (loss) per common share
|
$
|
0.34
|
|
|
0.28
|
|
|
0.98
|
|
|
(5.13)
|
|
|
Diluted earnings (loss) per common share (1)
|
$
|
0.34
|
|
|
0.28
|
|
|
0.98
|
|
|
(5.13)
|
|
______________________________________________________________________
(1)For the nine months ended September 30, 2019, we excluded from the calculation of diluted loss per share 2.3 million shares, potentially issuable under incentive compensation plans or convertible securities, as their effect, if included, would have been anti-dilutive.
Our calculation of diluted earnings (loss) per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock. We also exclude unvested restricted stock awards that are antidilutive as a result of unrecognized compensation cost. Such shares averaged 0.4 million and 5.2 million for the three months ended September 30, 2020 and 2019, respectively, and 4.0 million and 8.3 million for the nine months ended September 30, 2020 and 2019, respectively.
(9) Fair Value of Financial Instruments
Our financial instruments consist of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, long-term debt, excluding finance lease and other obligations, and interest rate swap contracts. Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
The three input levels in the hierarchy of fair value measurements defined by the Fair Value Measurement and Disclosure framework are generally as follows:
|
|
|
|
|
|
|
|
|
|
|
Input Level
|
|
Description of Input
|
|
Level 1
|
|
Observable inputs such as quoted market prices in active markets.
|
|
Level 2
|
|
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
|
|
Level 3
|
|
Unobservable inputs in which little or no market data exists.
|
The following table presents the carrying amounts and estimated fair values of our financial liabilities as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Input
Level
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
(Dollars in millions)
|
|
Long-term debt, excluding finance lease and other obligations
|
2
|
|
$
|
32,300
|
|
|
33,298
|
|
|
34,472
|
|
|
35,737
|
|
|
Interest rate swap contracts (see Note 10)
|
2
|
|
$
|
127
|
|
|
127
|
|
|
51
|
|
|
51
|
|
(10) Derivative Financial Instruments
From time to time, we use derivative financial instruments, primarily interest rate swaps, to manage our exposure to fluctuations in interest rates. Our primary objective in managing interest rate risk is to decrease the volatility of our earnings and cash flows affected by changes in the underlying rates. We have floating rate long-term debt (see Note 5—Long-Term Debt and Credit Facilities above). These obligations expose us to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. We have designated our currently outstanding interest rate swap agreements as cash flow hedges. As described further below, under these hedges, we receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the lives of the agreements without exchange of the underlying notional amount. The change in the fair value of the interest rate swap agreements is reflected in accumulated other comprehensive income ("AOCI") and, as described below, is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. We do not use derivative financial instruments for speculative purposes.
In February 2019, we entered into five variable-to-fixed interest rate swap agreements to hedge the interest payments on $2.5 billion notional amount of floating rate debt. The five interest rate swap agreements are with different counterparties; one for $700 million and the other four for $450 million each. The transactions were effective beginning March 31, 2019 and mature March 31, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one-month floating LIBOR terms and pay interest at the fixed rate of 2.48%.
In June 2019, we entered into six variable-to-fixed interest rate swap agreements to hedge the interest payments on $1.5 billion notional amount of floating rate debt. The six interest rate swap agreements are with different counterparties for $250 million each. The transactions were effective beginning June 30, 2019 and mature June 30, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one-month floating LIBOR terms and pay interest at the fixed rate of 1.58%.
As of September 30, 2020 and December 31, 2019, we evaluated the effectiveness of our hedges qualitatively and any hedges we had entered into at the time qualified as effective hedge relationships.
We are exposed to credit-related losses in the event of non-performance by counterparties. The counterparties to any of the financial derivatives we enter into are major institutions with investment grade credit ratings. We evaluate counterparty credit risk before entering into any hedge transaction and continue to closely monitor financial markets and the risk that our counterparties will default on their obligations as part of our quarterly qualitative effectiveness evaluation.
Amounts accumulated in AOCI related to derivatives are indirectly recognized in earnings as periodic settlement payments are made throughout the term of the swaps.
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheet at September 30, 2020 and December 31, 2019, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Derivatives designated as
|
Balance Sheet Location
|
|
Fair Value
|
|
Cash flow hedging contracts
|
Other current and noncurrent liabilities
|
|
$
|
127
|
|
|
51
|
|
The amount of unrealized (gains) losses recognized in AOCI consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
2020
|
|
2019
|
|
Cash flow hedging contracts
|
|
|
|
|
|
Three Months Ended September 30,
|
|
$
|
(1)
|
|
|
14
|
|
|
Nine Months Ended September 30,
|
|
$
|
115
|
|
|
71
|
|
The amount of realized losses reclassified from AOCI to the statement of operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
2020
|
|
2019
|
|
Cash flow hedging contracts
|
|
|
|
|
|
Three Months Ended September 30,
|
|
$
|
20
|
|
|
—
|
|
|
Nine Months Ended September 30,
|
|
$
|
41
|
|
|
—
|
|
Amounts currently included in AOCI will be reclassified into earnings prior to the ongoing settlements of these cash flow hedging contracts until 2022. We estimate that $81 million of net losses on the interest rate swaps (based on the estimated LIBOR curve as of September 30, 2020) will be reflected in our statements of operations within the next 12 months.
(11) Segment Information
As described in more detail below, our segments are managed based on the direct costs of providing services to their customers and the associated selling, general and administrative costs (primarily salaries and commissions). Shared costs are managed separately and included in "Operations and Other" in the tables below. We reclassified certain prior period amounts to conform to the current period presentation, See Note 1— Background for further detail on these changes.
At September 30, 2020, we had the following five reportable segments:
•International and Global Accounts Management ("IGAM") Segment. Under our IGAM segment, we provide our products and services to approximately 200 global enterprise customers and to enterprises and carriers in three operating regions: Europe Middle East and Africa, Latin America and Asia Pacific;
•Enterprise Segment. Under our enterprise segment, we provide our products and services to large and regional domestic and global enterprises, as well as public sector, which includes the U.S. federal government, state and local governments and research and education institutions;
•Small and Medium Business ("SMB") Segment. Under our SMB segment, we provide our products and services to small and medium businesses directly and through our indirect channel partners;
•Wholesale Segment. Under our wholesale segment, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. Our wholesale customers range from large global telecom providers to small regional providers; and
•Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Additionally, Connect America Fund ("CAF") federal support revenue and other revenue from leasing and subleasing are reported in our consumer segment as regulatory revenue.
Product and Service Categories
We categorize our products and services revenue among the following four categories for the IGAM, Enterprise, SMB and Wholesale segments:
•IP and Data Services, which includes primarily VPN data networks, Ethernet, IP, content delivery and other ancillary services;
•Transport and Infrastructure, which includes wavelengths, dark fiber, private line, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services;
•Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services; and
•IT and Managed Services, which includes information technology services and managed services, which may be purchased in conjunction with our other network services.
We categorize our products and services revenue among the following four categories for the Consumer segment:
•Broadband, which includes high-speed fiber based and lower speed DSL broadband services;
•Voice, which includes local and long-distance services;
•Regulatory Revenue, which consists of (i) CAF and other support payments designed to reimburse us for various costs related to certain telecommunications services and (ii) other operating revenue from the leasing and subleasing of space; and
•Other, which includes retail video services (including our linear and TV services), professional services and other ancillary services.
The following tables summarize our segment results for the three months ended September 30, 2020 and 2019, based on the segment categorization we were operating under at September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
|
(Dollars in millions)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
381
|
|
611
|
|
266
|
|
318
|
|
—
|
|
1,576
|
|
—
|
|
1,576
|
|
|
Transport and Infrastructure
|
315
|
|
420
|
|
85
|
|
447
|
|
—
|
|
1,267
|
|
—
|
|
1,267
|
|
|
Voice and Collaboration
|
87
|
|
357
|
|
271
|
|
183
|
|
—
|
|
898
|
|
—
|
|
898
|
|
|
IT and Managed Services
|
52
|
|
51
|
|
13
|
|
1
|
|
—
|
|
117
|
|
—
|
|
117
|
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
730
|
|
730
|
|
—
|
|
730
|
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
401
|
|
401
|
|
—
|
|
401
|
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
153
|
|
153
|
|
—
|
|
153
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
25
|
|
25
|
|
—
|
|
25
|
|
|
Total revenue
|
835
|
|
1,439
|
|
635
|
|
949
|
|
1,309
|
|
5,167
|
|
—
|
|
5,167
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of services and products
|
229
|
|
478
|
|
94
|
|
120
|
|
47
|
|
968
|
|
1,268
|
|
2,236
|
|
|
Selling, general and administrative
|
58
|
|
124
|
|
97
|
|
16
|
|
118
|
|
413
|
|
437
|
|
850
|
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(31)
|
|
(31)
|
|
|
Total expense
|
287
|
|
602
|
|
191
|
|
136
|
|
165
|
|
1,381
|
|
1,674
|
|
3,055
|
|
|
Total adjusted EBITDA
|
$
|
548
|
|
837
|
|
444
|
|
813
|
|
1,144
|
|
3,786
|
|
(1,674)
|
|
2,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
|
(Dollars in millions)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
404
|
|
631
|
|
270
|
|
353
|
|
—
|
|
1,658
|
|
—
|
|
1,658
|
|
|
Transport and Infrastructure
|
317
|
|
384
|
|
93
|
|
464
|
|
—
|
|
1,258
|
|
—
|
|
1,258
|
|
|
Voice and Collaboration
|
89
|
|
354
|
|
300
|
|
198
|
|
—
|
|
941
|
|
—
|
|
941
|
|
|
IT and Managed Services
|
56
|
|
59
|
|
11
|
|
2
|
|
—
|
|
128
|
|
—
|
|
128
|
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
718
|
|
718
|
|
—
|
|
718
|
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
453
|
|
453
|
|
—
|
|
453
|
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
157
|
|
157
|
|
—
|
|
157
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
37
|
|
37
|
|
—
|
|
37
|
|
|
Total revenue
|
866
|
|
1,428
|
|
674
|
|
1,017
|
|
1,365
|
|
5,350
|
|
—
|
|
5,350
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of services and products
|
235
|
|
451
|
|
99
|
|
134
|
|
50
|
|
969
|
|
1,365
|
|
2,334
|
|
|
Selling, general and administrative
|
64
|
|
132
|
|
108
|
|
15
|
|
122
|
|
441
|
|
390
|
|
831
|
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(38)
|
|
(38)
|
|
|
Total expense
|
299
|
|
583
|
|
207
|
|
149
|
|
172
|
|
1,410
|
|
1,717
|
|
3,127
|
|
|
Total adjusted EBITDA
|
$
|
567
|
|
845
|
|
467
|
|
868
|
|
1,193
|
|
3,940
|
|
(1,717)
|
|
2,223
|
|
The following tables summarize our segment results for the nine months ended September 30, 2020 and 2019 based on the segment categorization we were operating under at September 30, 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
|
(Dollars in millions)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
1,167
|
|
1,862
|
|
798
|
|
965
|
|
—
|
|
4,792
|
|
—
|
|
4,792
|
|
|
Transport and Infrastructure
|
942
|
|
1,181
|
|
265
|
|
1,327
|
|
—
|
|
3,715
|
|
—
|
|
3,715
|
|
|
Voice and Collaboration
|
275
|
|
1,084
|
|
843
|
|
561
|
|
—
|
|
2,763
|
|
—
|
|
2,763
|
|
|
IT and Managed Services
|
165
|
|
165
|
|
33
|
|
2
|
|
—
|
|
365
|
|
—
|
|
365
|
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
2,178
|
|
2,178
|
|
—
|
|
2,178
|
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
1,231
|
|
1,231
|
|
—
|
|
1,231
|
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
463
|
|
463
|
|
—
|
|
463
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
80
|
|
80
|
|
—
|
|
80
|
|
|
Total revenue
|
2,549
|
|
4,292
|
|
1,939
|
|
2,855
|
|
3,952
|
|
15,587
|
|
—
|
|
15,587
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of services and products
|
694
|
|
1,388
|
|
297
|
|
383
|
|
131
|
|
2,893
|
|
3,810
|
|
6,703
|
|
|
Selling, general and administrative
|
184
|
|
395
|
|
316
|
|
49
|
|
352
|
|
1,296
|
|
1,302
|
|
2,598
|
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(120)
|
|
(120)
|
|
|
Total expense
|
878
|
|
1,783
|
|
613
|
|
432
|
|
483
|
|
4,189
|
|
4,992
|
|
9,181
|
|
|
Total adjusted EBITDA
|
$
|
1,671
|
|
2,509
|
|
1,326
|
|
2,423
|
|
3,469
|
|
11,398
|
|
(4,992)
|
|
6,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
|
(Dollars in millions)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
1,221
|
|
1,901
|
|
817
|
|
1,028
|
|
—
|
|
4,967
|
|
—
|
|
4,967
|
|
|
Transport and Infrastructure
|
949
|
|
1,085
|
|
282
|
|
1,441
|
|
—
|
|
3,757
|
|
—
|
|
3,757
|
|
|
Voice and Collaboration
|
267
|
|
1,078
|
|
929
|
|
584
|
|
—
|
|
2,858
|
|
—
|
|
2,858
|
|
|
IT and Managed Services
|
169
|
|
198
|
|
34
|
|
6
|
|
—
|
|
407
|
|
—
|
|
407
|
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
2,158
|
|
2,158
|
|
—
|
|
2,158
|
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
1,397
|
|
1,397
|
|
—
|
|
1,397
|
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
471
|
|
471
|
|
—
|
|
471
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
137
|
|
137
|
|
—
|
|
137
|
|
|
Total revenue
|
2,606
|
|
4,262
|
|
2,062
|
|
3,059
|
|
4,163
|
|
16,152
|
|
—
|
|
16,152
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of services and products
|
698
|
|
1,313
|
|
306
|
|
408
|
|
159
|
|
2,884
|
|
3,993
|
|
6,877
|
|
|
Selling, general and administrative
|
198
|
|
421
|
|
347
|
|
44
|
|
403
|
|
1,413
|
|
1,310
|
|
2,723
|
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(114)
|
|
(114)
|
|
|
Total expense
|
896
|
|
1,734
|
|
653
|
|
452
|
|
562
|
|
4,297
|
|
5,189
|
|
9,486
|
|
|
Total adjusted EBITDA
|
$
|
1,710
|
|
2,528
|
|
1,409
|
|
2,607
|
|
3,601
|
|
11,855
|
|
(5,189)
|
|
6,666
|
|
Revenue and Expenses
Our segment revenue includes all revenue from our five segments as described in more detail above. Our segment revenue is based upon each customer's classification. We report our segment revenue based upon all services provided to that segment's customers. Our segment expenses include specific cost of service expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities.
The following items are excluded from our segment results, because they are centrally managed and not monitored by or reported to our chief operating decision maker by segment:
•network expenses not incurred as a direct result of providing services and products to segment customers;
•centrally managed expenses such as Operations, Finance, Human Resources, Legal, Marketing, Product Management and IT, which are reported as "Operations and Other";
•depreciation and amortization expense or impairments;
•interest expense, because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments;
•stock-based compensation; and
•other income and expense items are not monitored as a part of our segment operations.
The following table reconciles total segment adjusted EBITDA to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Total segment adjusted EBITDA
|
$
|
3,786
|
|
|
3,940
|
|
|
11,398
|
|
|
11,855
|
|
|
Depreciation and amortization
|
(1,193)
|
|
|
(1,235)
|
|
|
(3,515)
|
|
|
(3,619)
|
|
|
Impairment of goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,506)
|
|
|
Other operating expenses
|
(1,674)
|
|
|
(1,717)
|
|
|
(4,992)
|
|
|
(5,189)
|
|
|
Stock-based compensation
|
(31)
|
|
|
(38)
|
|
|
(120)
|
|
|
(114)
|
|
|
Operating income (loss)
|
888
|
|
|
950
|
|
|
2,771
|
|
|
(3,573)
|
|
|
Total other expense, net
|
(408)
|
|
|
(540)
|
|
|
(1,345)
|
|
|
(1,542)
|
|
|
Income (loss) before income taxes
|
480
|
|
|
410
|
|
|
1,426
|
|
|
(5,115)
|
|
|
Income tax expense
|
114
|
|
|
108
|
|
|
369
|
|
|
377
|
|
|
Net income (loss)
|
$
|
366
|
|
|
302
|
|
|
1,057
|
|
|
(5,492)
|
|
(12) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at September 30, 2020, aggregated to approximately $129 million and are included in other current liabilities and other liabilities in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.
Principal Proceedings
Shareholder Class Action Suit
Lumen and certain Lumen Board of Directors members and officers were named as defendants in a putative shareholder class action lawsuit filed on June 12, 2018 in the Boulder County District Court of the state of Colorado, captioned Houser et al. v. CenturyLink, et al. The complaint asserts claims on behalf of a putative class of former Level 3 shareholders who became CenturyLink, Inc. shareholders as a result of our acquisition of Level 3. It alleges that the proxy statement provided to the Level 3 shareholders failed to disclose various material information of several kinds, including information about strategic revenue, customer loss rates, and customer account issues, among other items. The complaint seeks damages, costs and fees, rescission, rescissory damages, and other equitable relief. In May 2020, the court dismissed the complaint. Plaintiffs appealed that decision, and the appeal is pending.
State Tax Suits
Since 2012, a number of Missouri municipalities have asserted claims in the Circuit Court of St. Louis County, Missouri, alleging that we and several of our subsidiaries have underpaid taxes. These municipalities are seeking, among other things, declaratory relief regarding the application of business license and gross receipts taxes and back taxes from 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with one of these pending cases, the court entered an order awarding plaintiffs $4 million and broadening the tax base on a going-forward basis. We appealed that decision to the Missouri Supreme Court. In December 2019, it affirmed the circuit court's order in some respects and reversed it in others, remanding the case to the circuit court for further proceedings. The Missouri Supreme Court's decision reduced our exposure in the case. In a June 2017 ruling in connection with another one of these pending cases, the circuit court made findings in a non-final ruling which, if not overturned or modified in light of the Missouri Supreme Court's decision, will result in a tax liability to us well in excess of the contingent liability we have established. The circuit court has indicated it does not intend to alter its 2017 ruling when it issues its final decision. Once a final decision is issued, we will have the right to pursue an appeal. We continue to vigorously defend against these claims.
Billing Practices Suits
In June 2017, a former employee filed an employment lawsuit against us claiming that she was wrongfully terminated for alleging that we charged some of our retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then and based in part on the allegations made by the former employee, several legal proceedings have been filed.
In June 2017, McLeod v. CenturyLink, a consumer class action, was filed against us in the U.S. District Court for the Central District of California alleging that we charged some of our retail customers for products and services they did not authorize. Other complaints asserting similar claims were filed in other federal and state courts. The lawsuits assert claims including fraud, unfair competition and unjust enrichment. Also in June 2017, Craig. v. CenturyLink, Inc., et al., a securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that we failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed.
Beginning June 2017, we also received several shareholder derivative demands addressing related topics. In August 2017, the Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, derivative cases were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita and in federal court in Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink, Inc. against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
The consumer class actions, the securities investor class actions, and the federal derivative actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. Subject to confirmatory discovery and court approval, we have agreed to settle the consumer class actions for payments of $15.5 million to compensate class members and of up to $3.5 million for administrative costs. In the second quarter of 2019, we accrued for these obligations, and a portion of the administrative costs has been expended in 2020. Certain class members may elect to opt out of the class settlement and pursue the resolution of their individual claims against us on these issues through various dispute resolution processes, including individual arbitration. One law firm asserts it has opt out requests from approximately 12,000 class members. To the extent that a substantial number of class members meet the contractual requirements to arbitrate, elect to opt out of the settlement (or otherwise successfully exclude their individual claims), and actually pursue arbitrations, the Company could incur a material amount of filing and other arbitrations fees in relation to the administration of those claims.
In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices.
We have engaged in discussions regarding potential resolutions of these claims with a number of state attorneys general, and have entered into agreements settling the Minnesota suit and certain of the consumer practices claims asserted by state attorneys general. While we do not agree with allegations raised in these matters, we have been willing to consider reasonable settlements where appropriate.
As previously disclosed, in the fourth quarter of 2019, we recorded an accrual with respect to the above-described settlements and other consumer litigation related matters.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million, of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, we believe the total amount of our exposure was $3 million as of September 30, 2020.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the Tribunal) decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. Oral argument was held before the Supreme Court of Justice in June 2019. A decision on this case is pending.
Brazilian Tax Claims
In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authority issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authority issued tax assessments to the same Brazilian subsidiary on similar issues. We filed objections to these assessments in both states, arguing, among other things, that neither the lease of assets nor the provision of Internet access qualify as “communication services” subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the respective state judicial courts.
In October 2012 and June 2014, the São Paulo state lower court ruled partially in our favor finding that the lease assets are not subject to ICMS in connection with the December 2004 and March 2009 assessments. The state of São Paulo appealed those rulings. Our objection to the April 2009 assessment is pending final administrative action in São Paulo. The July 2014 assessment was affirmed at the first administrative level and our appeal to the second administrative level is pending.
Regarding the September 2002 assessment, in July 2020, the Rio de Janeiro state court ruling in our favor became final once the appeals process had been exhausted. Accordingly, we released the related reserve. Our objections to the July 2009 and May 2012 assessments are still pending state judicial decisions.
We are vigorously contesting all such assessments in both states and view the assessment of ICMS on revenue from equipment leasing and Internet access to be without merit. These assessments, if upheld, could result in a loss of $16 million to as high as $44 million as of September 30, 2020 in excess of the accruals established for these matters.
Qui Tam Action
Level 3 was notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the U.S. District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint and an amended complaint were filed under seal on November 26, 2013 and June 16, 2014, respectively. The court unsealed the complaints on October 26, 2017.
The amended complaint alleges that Level 3, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.
Level 3 is evaluating its defenses to the claims. At this time, Level 3 does not believe it is probable Level 3 will incur a material loss. If, contrary to its expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Several people, including two former Level 3 employees, were indicted in the U.S. District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered into a plea agreement, and the other is deceased. Level 3 is fully cooperating in the government’s investigations in this matter.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial during 2020 if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties.
The outcome of these other proceedings described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 19 - Commitments, Contingencies and Other Items - to the financial statements included in Item 8 of part II of our Annual Report on Form 10-K for the year ended December 31, 2019. The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.
(13) Other Financial Information
Other Current Assets
The following table presents details of other current assets reflected in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(Dollars in millions)
|
|
Prepaid expenses
|
$
|
312
|
|
|
274
|
|
|
Income tax receivable
|
6
|
|
|
35
|
|
|
Materials, supplies and inventory
|
112
|
|
|
105
|
|
|
Contract assets
|
35
|
|
|
42
|
|
|
Contract acquisition costs
|
172
|
|
|
178
|
|
|
Contract fulfillment costs
|
117
|
|
|
115
|
|
|
Other
|
81
|
|
|
70
|
|
|
Total other current assets
|
$
|
835
|
|
|
819
|
|
(14) Accumulated Other Comprehensive Loss
Information Relating to 2020
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Post-Retirement
Benefit Plans
|
|
Foreign Currency
Translation
Adjustment
and Other
|
|
Interest Rate Swap
|
|
Total
|
|
|
(Dollars in millions)
|
|
Balance at December 31, 2019
|
$
|
(2,229)
|
|
|
(184)
|
|
|
(228)
|
|
|
(39)
|
|
|
(2,680)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
(181)
|
|
|
(87)
|
|
|
(268)
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
110
|
|
|
12
|
|
|
—
|
|
|
31
|
|
|
153
|
|
|
Net current-period other comprehensive income (loss)
|
110
|
|
|
12
|
|
|
(181)
|
|
|
(56)
|
|
|
(115)
|
|
|
Balance at September 30, 2020
|
$
|
(2,119)
|
|
|
(172)
|
|
|
(409)
|
|
|
(95)
|
|
|
(2,795)
|
|
The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Decrease (Increase)
in Net Income
|
|
Affected Line Item in Consolidated Statement of Operations
|
|
|
|
(Dollars in millions)
|
|
|
|
Interest rate swaps
|
|
$
|
20
|
|
|
Interest expense
|
|
Income tax expense
|
|
(5)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension & post-retirement plans(1)
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
50
|
|
|
Other income (loss), net
|
|
Prior service cost
|
|
1
|
|
|
Other income (loss), net
|
|
Curtailment loss
|
|
4
|
|
|
Other income (loss), net
|
|
Total before tax
|
|
55
|
|
|
|
|
Income tax expense
|
|
(13)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Decrease (Increase) in Net Income
|
|
Affected Line Item in Consolidated Statement of Operations
|
|
|
|
(Dollars in millions)
|
|
|
|
Interest rate swaps
|
|
$
|
41
|
|
|
Interest expense
|
|
Income tax expense
|
|
(10)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension & post-retirement plans (1)
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
152
|
|
|
Other income (loss), net
|
|
Prior service cost
|
|
5
|
|
|
Other income (loss), net
|
|
Curtailment loss
|
|
4
|
|
|
Other income (loss), net
|
|
Total before tax
|
|
161
|
|
|
|
|
Income tax expense
|
|
(39)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
122
|
|
|
|
(1)See Note 7—Employee Benefits for additional information on our net periodic benefit (income) expense related to our pension and post-retirement plans.
Information Relating to 2019
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Post-Retirement
Benefit Plans
|
|
Foreign Currency
Translation
Adjustment
and Other
|
|
Interest Rate Swap
|
|
Total
|
|
|
(Dollars in millions)
|
|
Balance at December 31, 2018
|
$
|
(2,173)
|
|
|
(58)
|
|
|
(230)
|
|
|
—
|
|
|
(2,461)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
(115)
|
|
|
(54)
|
|
|
(169)
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
122
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
131
|
|
|
Net current-period other comprehensive income (loss)
|
122
|
|
|
9
|
|
|
(115)
|
|
|
(54)
|
|
|
(38)
|
|
|
Balance at September 30, 2019
|
$
|
(2,051)
|
|
|
(49)
|
|
|
(345)
|
|
|
(54)
|
|
|
(2,499)
|
|
The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Decrease (Increase)
in Net Income
|
|
Affected Line Item in Consolidated Statement of Operations
|
|
|
|
(Dollars in millions)
|
|
|
|
Amortization of pension & post-retirement plans(1)
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
54
|
|
|
Other income, net
|
|
Prior service cost
|
|
3
|
|
|
Other income, net
|
|
Total before tax
|
|
57
|
|
|
|
|
Income tax benefit
|
|
(14)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Decrease (Increase) in Net Income
|
|
Affected Line Item in Consolidated Statement of Operations
|
|
|
|
(Dollars in millions)
|
|
|
|
Amortization of pension & post-retirement plans (1)
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
167
|
|
|
Other income, net
|
|
Prior service cost
|
|
7
|
|
|
Other income, net
|
|
Total before tax
|
|
174
|
|
|
|
|
Income tax benefit
|
|
(43)
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
131
|
|
|
|
(1)See Note 7—Employee Benefits for additional information on our net periodic benefit (income) expense related to our pension and post-retirement plans.
(15) Labor Union Contracts
As of September 30, 2020, approximately, 24% of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). Approximately 2% of our union-represented employees were subject to collective bargaining agreements that expired as of September 30, 2020 and are currently being renegotiated. Approximately 13% of our represented employees are subject to collective bargaining agreements that are scheduled to expire over the 12 month period ending September 30, 2021.